Switzer on Saturday

Best US jobless numbers in 50 years!

Founder and Publisher of the Switzer Report
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US stocks dived on Thursday following a night’s sleep on the Fed’s official comments on interest rates. And the market again had become fixated on one word. Around Christmas, the word was “patience” uttered by the Fed boss, Jerome Powell. This week it was “transitory”.

Using this word when it came to the current state of inflation meant that the market started to doubt its recent view that rates were on hold for a long time and the next move could/should be down. Instead, Powell was showing a sign that he wasn’t under Donald Trump’s thumb on rates and that if economic activity was stronger and inflation was threatening, he might rate interest rates, as all good central bankers would.

That independence sign saw the market sell off but all was forgiven on Friday when interest rate pessimism gave way to unemployment optimism. Overnight, US unemployment reached a 50-year low!

The jobless rate dropped to 3.6% from 3.8% and the rise in jobs created was 263,000 over April, against a market guess of 190,000. That’s a big beat! The only concern was that 490,000 workers left the labour force, which is a sign that can be a worry if a trend develops.

However, the rise in wages, up 3.2%, indicates that workers are starting to share in the economic upswing.

This chart shows how the jobless rate has tumbled since the GFC and how the 1983-84 recession was even worse.

What’s interesting is the reaction of the stock market, as this strong result could easily have led to a sell off on the basis that maybe the numbers suggest that a rate rise could be sooner than you think.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, called it a “strong” jobs report, “but payroll gains can’t continue at this pace”. He saw it as good news for wage-earners. While he didn’t see the Fed moving soon, he believed that similar data in future could “prompt something of a rethink at the Fed.” (BBC)

But here’s a question for you: what happened to the recession that the so-called infallible bond market was predicting with its inverted yield curve? You’d have to say Trump 1, Bond market 0.

The Dow ended up 197 points (or 0.75%), while the S&P 500 whacked on 0.96% and the Nasdaq surged 1.58%, helped along by Warren Buffett, who revealed to CNBC that his investment team was buying Amazon. That gave the company a 3.2% boost and was its first rise in five days.

What’s interesting is that this stock price pick up still left the Dow down 0.1% for the week. But if you want to believe that this isn’t a sign that the US market is going to have trouble going higher, have a look at what Wall Street bull Tom Lee is predicting: “In a note to clients, the co-founder of Fundstrat Global Advisors raised his S&P 500 year-end target to 3125 from 2925, which represents a 7% gain from Thursday’s 2917 close. As of Thursday, the S&P 500 has risen more than 17% this year.”

Unless you’re shorting the market, you have to hope Tom isn’t smoking anything and is a very, very smart guy. For those interested, Tom was  J.P. Morgan’s chief equity strategist from 2007 to 2014 and before that was managing director at Salomon Smith Barney.

He’s not a dope, so let’s hope he’s on the money!

Our stock market should benefit from the US news, as it just can’t beat gravity at the moment. It wasn’t helped this week when some pretty important companies revealed uninspiring bottom line reports and NAB went as far as cutting its dividend, which was one of the money world’s worst kept secrets.

The ghost of Justice Kenneth Hayne and his Royal Commission keeps haunting us and I suspect the spooking has some time to run. Weakness for the miners, with a higher US dollar, didn’t do any favours for the stock market index and neither did oil prices falling, with Russia, Iran and Venezuela news all negatives for the price of crude.

The S&P/ASX 200 index fell 49.8 points (or 0.8%) for the week to end at 6335.8.

The big market-mover yarns were:

  • NAB and ANZ reported half-year numbers.
  • NAB cut its interim dividend by 16% – 99 cents to 83 cents but its first-half profit rose 4.3% to $2.7 billion compared to the same period last year. The share price was unchanged at $25.67.
  • ANZ saw a 5% drop in profit to $3.2 billion, with compensation costs post-Royal Commission now at $1.4 billion! Its share price rose 1 cent to $27.41.
  • Macquarie reported well but gave a less bullish forecast for future earnings. Its share price dropped 5%.
  • Afterpay was up 16.1% to $27.65 after cracking a Citi support deal for its US expansion and giving colour to its UK plans.
  • Resmed put on 11.6%, after sales spiked 12%.
  • Woolworths’ share price hit a 52-week high, after putting on 14% before dividends. Morgans sees it going 11.9% higher in coming months.
  • The Oz dollar ended the week at 69.93 US cents, which defies the forecasts of Bank of America, saying the currency is off to 78 US cents by Christmas. China’s bounce back in growth is said to be the cause.

And in case you were wondering, the total returns on national dwellings fell by 3.6% in the year to April, with houses down by 4.2% on a year earlier and units down by 1.9%. In contrast, the S&P/ASX All Ordinaries Accumulation Index lifted by 10.2% over the year to April.

What I liked

  • The CoreLogic Home Value Index of national home prices fell by 0.49% in April (the smallest decline since September) to be down 7.2% over the year.
  • The Australian Industry Group (AiGroup) Australian Performance of Manufacturing Index rose by 3.8 points to 8-month highs of 54.8 points in April. The ‘final’ CBA Manufacturing Purchasing Managers’ Index (PMI) declined by 1.1 points to 50.9 points. Any reading over 50 indicates expansion.
  • The weekly ANZ-Roy Morgan consumer confidence rating fell by 1.6% to 117.6 points but consumer sentiment is still above both the average of 114.3 points held since 2014 and the longer-term average of 113.1 points since 1990.
  • In trend terms, Western Australian building approvals rose by 1.4% over the year to March – the strongest growth rate in four years.
  • US factory orders rose by 1.9% (survey: +1.6%) in March.
  • The ISM New York Index rose by 10.4 points to 77.3 points (survey: 66.7 points) in April.
  • US non-farm productivity rose by 3.6% (survey: +2.2%) in the March quarter.
  • US spending rose 0.9% in March (biggest gain in more than 9 years) after a 0.1% lift in February.
  • China’s official Manufacturing Purchasing Managers’ Index fell from 50.5 to 50.1 points in April (forecast 50.5). And the services gauge fell from 54.8 to 54.3 points (survey: 54.9 points) in April. A level above 50 denotes an expansion in activity. The Caixin Manufacturing Gauge fell from 50.8 to 50.2 points in April (forecast 50.9 points). I only ‘just’ liked this as it’s not a great reading.

What I didn’t like

  • In April, 75,550 new vehicles were sold (the weakest monthly sales since April 2011), down by 8.9% over the year. In the 12 months to April, sales totaled 1,122,731 units, down 6.5% on a year ago and the biggest annual decline in over nine years.
  • Council approvals to build new homes fell by 15.5% (consensus: -12%) in March to be down by 27.3% over the year.
  • The Australian Industry Group (AiG) Performance of Services Index (PSI) rose by 1.7 points to 46.5 points in April but contracted for a fourth successive month. A reading below 50 indicates a contraction of services sector activity.
  • Private sector credit (effectively outstanding loans) rose by 0.3% in March (consensus: +0.3%) after a 0.3 % rise in February. Annual credit growth fell to a five-year low of 3.9% in March. And the annual personal credit growth rate fell to a nine-year low of 2.8%.
  • European share marketsfell by the most in six weeks on Thursday after central bank announcements and weak Eurozone factory activity disappointed investors.

Keep this house price drop drama in perspective!

Sydney prices are down 14.5% from their July 2017 high, which is their worst fall since the early 1980s recession.  Melbourne prices are down 10.9% from their November 2017 high, which is their worst fall in the period since 1980.

But in reality, Sydney prices are down 14.5% in 1¾ years – let’s call it 8% a year! This is NOT Armageddon!

The week in review:

Top Stocks – how they fared:

What moved the market?

  • The Fed kept interest rates on hold in the 2.25-2.50% range, following its announcement earlier this year that it does not expect to cut rates for the remainder of 2019.
  • The United States and China are reportedly close to making a trade deal. Talks continued this week as a delegation from the US headed to Beijing.
  • Oil prices fell to a one-month low, with rising US crude stockpiles offsetting a global reduction in supply.

The Week Ahead:

Australia
Monday May 6 – ANZ job advertisements (April)
Monday May 6 – Melbourne Institute inflation gauge (April)
Tuesday May 7 – Reserve Bank Board meeting
Tuesday May 7 – Retail trade (March)
Tuesday May 7 – International trade (March)
Tuesday May 7 – ANZ-Roy Morgan consumer confidence
Tuesday May 7 – AiGroup Performance of Construction (April)
Friday May 10 – Statement on Monetary Policy

Overseas
Monday May 6 – China Caixin Services index (April)
Tuesday May 7 – US JOLTS job openings (March)
Tuesday May 7 – US Consumer credit (March)
Tuesday May 7 – US IBD/TIPP Economic Optimism (May)
Wednesday May 8 – China International trade (April)
Thursday May 9 – China Inflation (April)
Thursday May 9 – US International trade balance (March)
Thursday May 9 – US Federal Reserve Chair Powell speaks
Friday May 10 – US Consumer prices (April)
Friday May 10 – US Monthly Budget (April)

Food for thought:

“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” – Paul Samuelson 

Stocks shorted:

ASIC releases data daily on the major short positions in the market. These are the stocks with the highest proportion of their ordinary shares that have been sold short, which could suggest investors are expecting the price to come down. The table shows how this has changed compared to the week before.

Chart of the week:

After the Fed kept interest rates on hold earlier this week, and with the Reserve Bank announcing its interest rate decision at 2:30pm next Tuesday, CommSec published the following chart looking at the history of both since 2010:

Source: Reserve Bank, CommSec

Top 5 most clicked:

Recent Switzer Reports:

Monday 29 April: Aussie and overseas stocks

Thursday 03 May: Microsoft under the microscope

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.